Inventory Management, Dealers' Connections, and Prices in OTC Markets

64 Pages Posted: 18 Sep 2020

See all articles by Jean-Edouard Colliard

Jean-Edouard Colliard

HEC Paris - Finance Department

Thierry Foucault

HEC Paris - Finance Department

Peter Hoffmann

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2018

Abstract

We propose a new model of interdealer trading. Dealers trade together to reduce their inventory holding costs. Core dealers share these costs efficiently and provide liquidity to peripheral dealers, who have heterogeneous access to core dealers. We derive predictions about the effects of peripheral dealers' connectedness to core dealers and the allocation of aggregate inventories between core and peripheral dealers on the distribution of interdealer prices, the efficiency of interdealer trades, and trading costs for the dealers' clients. For instance, the dispersion of interdealer prices is higher when fewer peripheral dealers are connected to core dealers or when their aggregate inventory is higher.

Keywords: interdealer trading, Inventory management, OTC markets

Suggested Citation

Colliard, Jean-Edouard and Foucault, Thierry and Hoffmann, Peter, Inventory Management, Dealers' Connections, and Prices in OTC Markets (July 2018). CEPR Discussion Paper No. DP13093, Available at SSRN: https://ssrn.com/abstract=3226867

Jean-Edouard Colliard (Contact Author)

HEC Paris - Finance Department ( email )

France

Thierry Foucault

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
(33)139679569 (Phone)
(33)139677085 (Fax)

HOME PAGE: http://thierryfoucault.com/

Peter Hoffmann

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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